Creating Change

New policy and regulatory initiatives aimed at sector reform

In the past one year, the power sector has witnessed several policy and regulatory developments broadly aimed at addressing the power distribution issues, facilitating the large-scale integration of renewable energy sources and maintaining grid stability.

The two major policy developments have been the release of draft amendments to the Electricity Act, 2003 and the Tariff Policy, 2016, both of which are open for stakeholder consultation. Through these policy reforms, the government aims to overhaul the segment by introducing direct benefit transfer (DBT); penalising discoms for their failure to supply uninterrupted power and cap their aggregate technical and commercial (AT&C) losses; and enabling consumers to switch suppliers by separating carriage and content.

On the regulatory front, the key developments pertained to the introduction of 5-minute scheduling and fast response ancillary services for hydro, the adoption of a national frequency to ensure grid stability and the move towards an advanced real-time electricity market.

Power Line presents a round-up of the key policy and regulatory measures taken during the past one year…

Policy updates

Draft amendments to the Electricity Act, 2003: The amendments to the Electricity Act, 2003, which have been pending for a long time, are now back on the policy agenda. The government invited industry and stakeholder comments on the draft amendments in September 2018. Some of the key legislative changes proposed in the act are introduction of DBT for subsidy disbursal to consumers, freeing up of renewable energy generation and supply from licensing requirements, and separation of the carriage and content businesses in power distribution. Further, the act proposes to penalise discoms, and even cancel their licences, for the violation of power purchase agreements (PPAs), non-compliance with renewable purchase obligations (RPOs), failure to ensure 24×7 power supply, etc. Besides, it proposes progressive reduction of the cross-subsidy surcharge and mandatory installation of smart meters. It also proposes setting up of committees at three levels (national, regional and state) to facilitate efficient, economical and integrated transmission and supply of electricity.

Scheme for national merit order operation: In August 2018, the Ministry of Power (MoP) released a scheme for flexibility in generation and scheduling of thermal power stations. The scheme allows generating companies to supply power from any of their thermal power plants against the schedule fixed for its plants. The regional load despatch centres/ National Load Despatch Centre will schedule the stations of a generating company as per the merit order of the generating company, such that electricity from the station with the least energy charge rate is despatched to the maximum extent. The cost savings from the national merit order operation of stations will be split between the generating company and the beneficiaries. In a separate development, earlier, in April 2018, the MoP notified a mechanism for allowing flexibility in the generation and scheduling of thermal power stations. This provides flexibility to the generating companies (with tariff-regulated thermal stations) to use their thermal or renewable power to meet the scheduled generation. This will give generators an opportunity to optimally utilise their renewable capacity, reduce emission levels and help the discoms in meeting their RPOs.

State Energy Efficiency Preparedness Index: In August 2018, the MoP launched the country’s first State Energy Efficiency Preparedness Index. The index classifies the states as front runner, achiever, contender and aspirant based on their efforts and achievements in energy efficiency. While most states have implemented national programmes designed by the Bureau of Energy Efficiency and Energy Efficiency Services Limited, the front runner and achiever states have several individual initiatives as well. The front runner states in the inaugural edition of the index were Andhra Pradesh, Kerala, Maharashtra, Punjab and Rajasthan.

High-level empowered committee for stressed assets: In order to address the issue of stressed assets in the thermal power segment, the MoP, in July 2018, constituted a high-level empowered committee headed by the cabinet secretary with representatives from the Ministry of Railways, the Ministry of Finance, MoP, Ministry of Coal and the lenders having major exposure to the power sector. The committee would look into the various issues with a view to resolving them and maximise the investment efficiency in the power sector by deliberating on the changes required in the fuel allocation policy, regulatory framework, mechanisms for the sale of power and payment, the provisioning norms/Insolvency and Bankruptcy Code, and regulations for asset restructuring companies.

Draft amendments to the Tariff Policy, 2016: In May 2018, the MoP issued draft amendments to the Tariff Policy, 2016. Among other things, the draft amendments propose that any change in domestic duties, levies, charges, surcharges, cess and taxes after the award of project will be allowed as pass-through; the state electricity regulatory commissions will not consider AT&C losses exceeding 15 per cent for tariff determination after March 31, 2019; the discoms will be penalised for unscheduled load shedding without valid reasons; and the DBT mechanism will be adopted for providing subsidy to consumers. Another key proposal under the draft is to exempt power plants of all central public sector units from mandatory tariff-based competitive bidding, which has drawn significant criticism from private developers. In September 2018, the MoP proposed another addition to the draft amendment regarding the simplification of tariff categories and rationalisation of the retail tariff structure with the objective of doing away with different tariff categories and adoption of a tariff structure based on sanctioned load and the units consumed.

Aggregate power procurement scheme: In a bid to revive discoms’ demand, in April 2018, the MoP launched a pilot scheme for the centralised procurement of 2,500 MW of power capacity for a period of three years through competitive bidding. In the first auction undertaken in July 2018, seven companies — RKM PowerGen (550 MW), Jaypee Nigrie Thermal (100 MW), IL&FS Energy Limited (550 MW), MB Power (175 MW), SKS Chhattisgarh Power (300 MW), Jindal India Thermal Power Limited (125 MW) and Athen Jhabua Power (100 MW) — submitted bids for an aggregate capacity of 1,900 MW, matching the L1 bid of Rs 4.24 per unit. PTC India will sign PPAs with the winning bidders and back-to-back power sale agreements with the discoms.

Draft amendments to rules for captive power generation: In May 2018, the MoP issued draft amendments to the Electricity Rules, 2005, related to captive power plants (CPPs). A key clarification in the draft amendments pertains to ownership, wherein for a power plant to qualify as a CPP, captive users are required to have a stake of at least 26 per cent in such a unit and consume at least 51 per cent of the aggregate total electricity generated by it. The new rules propose to link the ownership of the CPP with the issued and paid-up share capital in the form of equity share capital and the proportion of electricity consumption by each captive user will be based on the entire power consumed by captive users. Also, the amendments propose that any power plant set up as an independent power producer (IPP) should not be eligible for the benefits available to a CPP, except under the few specific circumstances. IPPs have in the past sought CPP status due to the lack of long-term PPAs or low tariffs.

SBDs for UMPPs: In December 2017, the MoP notified the draft standard bidding documents (SBDs) and guidelines for ultra mega power projects (UMPPs) based on the allocated coal linkage. A key feature of the draft guidelines is the return to the old build-own-operate model of project development. Further, the guidelines stipulate that the onus of securing coal linkage for the UMPP will lie with the power procurers (discoms). Provisions have also been added regarding alternative coal supply arrangements, in the case of a shortage.

Fuel-related developments: On the coal front, one of the key policy developments was the release of MoP guidelines for the rationalisation of coal linkages for IPPs in May 2018. The rationalisation of linkages aims to reduce the distance over which coal is transported, thereby freeing up railway infrastructure for other gainful uses. Another important development was the approval of provisions for commercial mining by private players. In February 2018, the union cabinet approved the methodology for the auction of coal mines/blocks for the sale of coal under the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957. Apart from this, in January 2018, Coal India Limited announced a new pricing policy, which involves selling coal on the basis of total energy content in each consignment. However, the methodology has attracted criticism from a few sections for not taking into account the moisture content in the calculation.

Emission control costs pass-through: In June 2018, the MoP in a letter to the Central Electricity Regulatory Commission (CERC) stated that investments in the installation of emission control technologies in thermal power plants (TPPs) to ensure compliance with the Ministry of Environment, Forest and Climate Change’s environmental norms issued in December 2015 will be treated as change in law events. This is expected to drive investments in emission control technology and address the developers’ cost recovery concerns.

New coal stock monitoring norms: Another key development for TPPs was the release of the new coal stock monitoring norms by the Central Electricity Authority (CEA) in November 2017. The new methodology for monitoring coal stock at TPPs takes into account the flexibilisation scheme, which was notified by the MoP in May 2016. The revised norms state that while the normative coal stock will be calculated on the basis of coal requirement at 85 per cent PLF, the daily coal requirement of a TPP will be calculated as the rolling average of coal consumption in the past seven days.

Renewable energy-related developments: The renewable energy segment has witnessed a number of policy developments in the past 12 months. One of the key developments was the waiver of interstate transmission system losses and charges for solar and wind projects commissioned till March 31, 2022. Earlier, the waiver was applicable to solar projects commissioned till December 31, 2019 and wind projects commissioned till March 31, 2019.

Another major development in the renewable energy segment was the launch of the National Wind-Solar Hybrid Policy in May 2018. The policy aims to promote large grid-connected, wind-solar photovoltaic hybrid systems and is expected to enable the efficient utilisation of transmission infrastructure and land, along with improving grid stability.

In the solar energy segment, one of the key developments has been the imposition of a safeguard duty on solar cells imported from China and Malaysia for the next two years. The finance ministry has introduced the duty on solar cells to protect the interests of domestic manufacturing firms, which are struggling to survive the competition created by foreign players offering cheaper products. However, in August 2018, the finance ministry put a stay on the imposition of the duty owing to pending writ petitions in the Orissa High Court. The stay was lifted by the Supreme Court in September 2018. For now, the high court will continue to hear pleas against the duty and the amount collected will be refunded to the importers in case the duty is lifted. Another development has been the launch of the International Solar Alliance in December 2017, an international intergovernmental organisation, with 46 countries signing the framework agreement and 19 countries ratifying it.

In May 2018, the cabinet approved the National Policy on Biofuels. The policy categorises biofuels as basic biofuels (first-generation bioethanol and biodiesel) and advanced biofuels (second- generation ethanol, municipal solid waste to drop-in fuels, third-generation biofuels, bio-CNG, etc.) to provide appropriate financial and fiscal incentives to the segment.

Regulatory developments

Redesigning of the ancillary service mechanism: In September 2018, the CERC issued a discussion paper on “Re-Designing Ancillary Service Mechanism in India”. The paper assesses the performance of the current framework of frequency support and the current balancing ancillary services mechanism in the country, and suggests next-generation reforms by way of introduction of auction-based procurement of ancillary services.

Five-minute scheduling for thermal/ hydro, and hydro as FRAS: In July 2018, the CERC passed an order to implement pilots on 5-minute scheduling, metering, accounting and settlement for thermal/ hydro and on fast response ancillary services (FRAS) through hydro projects. The Power System Operation Corporation, in coordination with Power Grid Corporation of India Limited, will implement five-minute metering at hydro stations in the northern, eastern and north-eastern regions, and at thermal power stations with automatic generation control in all five regions. On the other hand, FRAS from storage/pondage-based hydro stations can act as a robust mechanism to handle the intermittency of renewable energy generation. The hydro stations are considered “energy limited resources” due to constraints in water inflows. However, these can respond much faster than thermal stations. FRAS will be triggered based on a stack prepared on the basis of the balance energy available at hydro stations and despatched without disturbing the schedules of the beneficiaries.

Redesigning of the electricity market: In July 2018, the CERC issued a discussion paper on “Redesigning Real Time Electricity Market in India”. The paper outlines the improvements required to ensure market operations closer to real time for better harnessing the intermittent renewable energy and optimally utilising resources in the intra-day time horizon. The real-time market redesign suggested in the paper seeks to introduce two elements – changeover from continuous trade to uniform auction in the intra-day market of the power exchange and gate closure.

APTEL’s order on the price of the RECs: In May 2018, the Appellate Tribunal for Electricity (APTEL) upheld CERC’s ruling to reduce the forbearance and floor price of solar and non-solar renewable energy certificates (RECs). In March 2017, the CERC had reduced the floor price of solar RECs from Rs 3,500 to Rs 1,000 per certificate and that of non-solar RECs from Rs 1,500 to Rs 1,000 per certificate, in order to accommodate the reduction in the price of renewable energy discovered through reverse bids. Industry bodies had challenged the regulator’s ruling in APTEL, leading to a stay on REC trading. While the stay order on trading of non-solar RECs was lifted in July 2017, the trading of solar REC commenced in April 2018 with APTEL upholding the CERC’s ruling.

CERC’s report on national frequency: In November 2017, the CERC released an expert group report that suggested measures for bringing power system operations closer to the national reference frequency. The report suggested several measures to ensure frequency control such as considering 50 Hz as the reference frequency, and monitoring system inertia at the regional and the national levels.

To conclude, although a number of policy and regulatory initiatives have been taken in the past 12 months to improve the state of the sector, the segment is headed towards some significant policy changes with the proposed amendments to the Electricity Act, 2003 and Tariff Policy, 2016 expected to be finalised soon.